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Tag: intent to defraud

Earlier this year, the Seventh Circuit affirmed summary judgment for a real estate analytics company sued by a software firm who claimed the company was pilfering on-line land records.

The plaintiff in Fidlar Technologies v. LPS Real Estate Data Solutions,810 F.3d 1075 (7th Cir. 2016) developed a software program called “Laredo” that computerized real estate records and made them available to viewers for a fee. The plaintiff sued when it found out that the defendant was using a web harvester to bypass plaintiff’s software controls and capture the electronic records. The defendant’s harvester allowed it to disguise the amount of time it was spending on-line and so avoid paying print fees associated with the electronic data.

The Computer Fraud And Abuse Act (CFAA) Claim

The Court found the was a lack of evidence to support plaintiff’s Computer Fraud and Abuse Act (CFAA) claim as plaintiff could not show the defendant’s “intent to defraud” or “damage” under the CFAA. See CFAA, 18 U.S.C. s. 1030.

CFAA: Intent to Defraud (18 U.S.C. s. 1030(a)(4)

The CFAA defines an intent to defraud as acting “willfully and with specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.” An intent to defraud can be shown by circumstantial evidence since direct intent evidence is typically unavailable.

The Court credited the defendant’s sworn testimony that printing real estate records was a minor part of its business and that it did pay maximum monthly access fees for computerized real estate data.

The defendant also produced evidence that it used its harvester not only in fee-charging counties, but also in those that didn’t charge at all. This bolstered its argument that the harvester’s fee-avoidance was an unintended consequence of the defendant’s program.

Finally, the Court noted that defendant’s agreements with the various county offices (which made the real estate data available) didn’t expressly prohibit the use of a web harvester. These factors all weighed against finding intentional conduct under the CFAA by the defendant analytics company.

CFAA: Transmission and Damage Claim (18 U.S.C. s. 1030(a)(5)(a)

The Seventh Circuit also rejected the plaintiff’s CFAA transmission claim; echoing the District Court’s cramped construction of the CFAA. The Court described the CFAA’s aim as punishing those who access computers in order to delete, destroy, or disable information.

“Damage” is defined in the CFAA as “any impairment to the integrity or availability of data, a program, a system or information….” 1030(e)(8). The Court interpreted this as destructive behavior aimed at injuring physical computer equipment or its stored data. Examples of this type of damaging conduct includes using a virus or deleting data. Flooding an email account with data could also qualify as CFAA damage according to at least one case cited by the court.

Here, the defendant’s conduct didn’t impair the integrity of any computer hardware or compromise any real estate data. The defendant’s attempt to bypass on-line printing access and print fees is not the type of damage envisioned by the CFAA. According to the Court, mere copying of computer data doesn’t fit the CFAA’s damage definition. 18 U.S.C. § 1030(e)(8).

Afterwords:

Fidlar represents a court narrowly applying the CFAA so that it doesn’t cover the type of economic loss (e.g. subscription fees, etc.) claimed here by the plaintiff. The case also illustrates that a successful CFAA claimant must show its computer equipment was physically harmed or its data destroyed. Otherwise, a plaintiff will have to choose a non-CFAA remedy such as a breach of contract, trespass to chattels or trade secrets violation.

The plaintiff developed a program called “Laredo” that computerized real estate records and made them available to viewers for a fee. The plaintiff sued when it found out that the defendant was using a web harvester to bypass plaintiff’s software controls and capture the electronic records. The defendant’s harvester allowed it to disguise the amount of time it was spending on-line and so avoid paying print fees associated with the electronic data.

The Computer Fraud And Abuse Act Claim

On its Computer Fraud and Abuse Act, 18 U.S.C. s. 1030 (“CFAA”) claim, the Court found there was a lack of evidence of defendant’s intent to defraud based on defendant evading the printing fees. The CFAA defines an intent to defraud as acting “willfully and with specific intent to deceive or cheat, usually for the purpose of getting financial gain for one’s self or causing financial loss to another.”

The court noted that defendant offered sworn testimony that printing real estate records was a minor part of its business and that it did pay the various counties the maximum monthly access fee for the real estate data. The defendant also produced evidence that it used its “client” program (which could avoid the time tracking and printing charges) not only in fee-charging counties, but also in those that didn’t charge at all. This bolstered its argument that the harvester’s fee-avoidance was an unintended consequence of the defendant’s program.

Siding with the defendant, the court applied the CFAA restrictively. It found that the Act’s aim is to punish those who access computers with the intention of deleting, destroying, or disabling information they find.

Attempting to avoid paying for minutes and printing fees – the “damage” alleged to have been done by the defendant here – wasn’t the type of damage contemplated by the CFAA. The mere copying of electronic information from a computer system isn’t enough to satisfy the CFAA’s damage requirement. 18 U.S.C. § 1030(e)(8).

Trespass to Chattels

The plaintiff’s trespass to chattels claim was also rejected. Trespass to chattel is an archaic legal doctrine aimed at protecting the integrity of someone’s personal property. To successfully claim trespass to chattels, a plaintiff i must show “direct physical interference.”

The court noted that any interference was plaintiff’s claimed loss of subscription revenue and loss of goodwill. These losses didn’t equal a physical threat to the proper functioning of plaintiff’s servers.

Afterwords:

Fidlar represents a court narrowly applying the CFAA so that it doesn’t cover the type of economic loss (e.g. subscription fees, etc.) claimed here by the plaintiff. The case also amply illustrates that a successful CFAA claimant must show that its computer equipment or system was physically damaged or its data destroyed. Otherwise, the proper remedy lies in a breach of contract or trade secrets violation.

The First District recently validated the mechanics liens of two “ma and pa” construction companies against a competing lienholder’s argument that the liens contained a flawed completion date and an exaggerated lien amount.

North Shore Community Bank v. Sheffield Wellington LLC, 2014 IL App (1st) 123784 is a priority dispute between mortgage lenders and mechanics lien claimants on commercial property. In examining the parties’ competing claims, the Court addresses what consequences flow from a contractor’s failure to accurately state and prove its completion date under the Illinois Mechanics’ Lien Act, 770 ILCS 60/1 et seq. (the “Lien Act”) and whether that failure defeats its lien claim.

The lender sued to foreclose its mortgage and two contractors counterclaimed to foreclose their mechanics liens on the site. One lien claimant – who built an office at the site – misstated its completion date by about a week while a roofing contractor couldn’t prove (in its deposition testimony and documents) that it actually performed on its stated completion date. In addition, the office builder’s principal admitted in his deposition that the lien amount could be off by as much as 10%. Based on the completion date and lien amount discrepancies, the lender moved for summary judgment against both contractors. The trial court granted the lender’s motion and found that the mortgage lien trumped the mechanics’ liens.

Held: Summary judgment reversed.

Rules/Reasons:

Reversing summary judgment for the lender, the Court expanded on the Lien Act’s purpose and discussed whether misstated recorded lien information was a binding judicial admission:

The Mechanics’ Lien Act’s Purpose

– The Lien Act’s purpose is to allow someone who has improved property by furnishing labor or materials to lien that property;

– Section 7 of the Lien Act requires a contractor to file its lien within 4 months after completion in order to enforce his lien against third-party creditors or other lienholders;

– While the Act is silent on completion date, the courts have interpreted Section 7 to require a lien claimant to include a completion date in order to be enforceable;

– Section 24 of the Act governs subcontractors and requires them to serve notice of their lien to the lender (“lending agency”) within 90 days after the completion date;

– Completion date under Section 7 and 24 doesn’t mean completion of the project in total; it just means completion of the work sought to be liened;

– The purpose of Section 7 (which governs contractors) and 24 (which governs subs) is to provide notice to third parties of the existence of a lien claim.

Overstated Liens – What Is ‘Intent to Defraud’?

– An overstated lien can be deemed fraudulent only where an “intent to defraud” is shown (770 ILCS 60/7a);

– A lien will be defeated where it contains a (1) knowing and (2) substantial overcharge;

– An intent to defraud can be proven by executed documents that overstate the amount in combination with some other evidence (i.e. a “Plus Factor”) from which fraudulent intent can be inferred;

– Section 7 of the Act is designed to protect the honest lien claimant who makes a mistake; not a dishonest claimant who knowingly makes a false statement;

Judicial Admissions – What Are They?

– A judicial admission is a “deliberate, clear, unequivocal statement” by a party about a concrete fact within that party’s knowledge;

– The effect of a judicial admission is that is withdraws a fact from dispute and makes unnecessary any need to prove the fact at trial;

– A statement that is the product of mistake or inadvertence is not a binding judicial admission;

– Judicial admissions are designed to deter perjury; they aren’t designed to punish honest mistakes;

– A litigant can’t contradict a prior judicial admission in summary judgment proceedings or at trial;

(¶¶ 81-90, 101-103, 126).

Applying these rules, the Court found that plaintiffs’ incorrect completion dates didn’t impact the mortgage lender’s notice rights. Both liens were facially valid since they were timely filed; even with a technically wrong completion date. The office subcontractor served its lien notice on the lender within 90 days of the completion of its work and the roofing general contractor filed its lien within the four-month period required Section 7.

The Court also noted that any incorrect completion dates were the results of honest mistakes – they weren’t binding judicial admissions. This was because the lien claimants were “ma and pa” companies with limited resources. One claimant was a single-person entity while the other had two employees that operated from a home office. The Court also credited testimony by one of the contractors that it had never filed a lien before and wasn’t sure what information was key to the completion date or lien amount questions. (¶¶129-130).

Finally, the Court rejected the lender’s constructive fraud argument – premised on the subcontractor’s officer admitting in a deposition that the lien amount could be “about 10% off.” There was no evidence that the subcontractor intentionally made a substantial overcharge and that any flawed numbering was the result of an honest mistake. An inflated lien amount – without more – is not enough for a constructive fraud finding.

Now What?: This case serves as a strong example of a court refusing to elevate form over substance. While a completion date is required, a minor error in that date won’t defeat the lien if its otherwise facially valid (i.e. timely filed). Also, constructive fraud in the lien context is hard to prove. If a lien claimant can show that a lien error is an honest mistake and not purposely exaggerated, that lien claimant may still be able to prosecute his lien foreclosure suit.